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The legal battle of the century is ready to begin.
Fortnightly Magazine - January 2004

PURPA-the Public Utility Regulatory Policies Act of 1978- that the commission used in ordering AEP into PJM.

PURPA permits FERC to "exempt" electric utilities from compliance with problematic state mandates that might otherwise interfere with the unobstructed coordination of power movements across the interstate transmission grid.

But no debate has so far focused on whether the Kentucky and Virginia public service commissions are in fact truly representing the wishes of their state when they oppose membership in regional power markets.

The state action doctrine, the product of the Supreme Court's 1943 opinion in Parker v. Brown, shields states from federal antitrust scrutiny in certain situations. Certainly, the decision by Kentucky and Virginia to oppose AEP's involvement in PJM could be considered anticompetitive conduct.

In a report issued last year, the Federal Trade Commission evaluated the state action doctrine and raised some interesting questions that apply to the Virginia and Kentucky PUCs. The first question: Do the utility commissions qualify as instrumentalities of the sovereign state?

The FTC points out that the state action doctrine rests on principles of federalism and the doctrine shields "sovereign" activities of the state itself, including the actions of the state legislature, a governor, or a state supreme court-provided these entities are acting in their sovereign capacity under the state constitution.

A state public service commission, for example, is not a sovereign empowered to articulate state policy. It merely performs tasks delegated to it by the state legislature. The doctrine extends to PSCs only if such agencies are acting pursuant to a delegation of authority from a governmental actor with independent, sovereign status, and if the recipient is understood as a voice of state policy.

According to the FTC, "To successfully assert a state action defense, these lower-level entities must demonstrate that they have used the delegation of authority to advance the interests of the state, rather than their own interests, by showing that the alleged anticompetitive regulatory conduct (1) is in conformity with a clearly articulated state policy, and (2) has been actively supervised by the state."

In its report, the FTC finds that some courts have applied the doctrine with little or no evidence that the state intended to restrain competition, even if anticompetitive effects spill over into other states. The FTC says, "Some courts have applied the doctrine in a manner that could potentially endanger national competition goals."

The report does not specifically address the issue among FERC, Kentucky, and Virginia. However, the report recommends clarification and reaffirmation of the original purposes of the state action doctrine to help ensure robust competition continues to protect consumers.

Even as Kentucky and the Virginia PSCs have established some record of state legislative backing, the question arises whether the PSCs in fact represent "deliberate and intended state policy." As states question the premise by which FERC acts, so too should the courts evaluate the premise by which the states act.


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